FAR 32.503-9—Liquidation rates-alternate method.
Plain-English Summary
FAR 32.503-9 explains when and how the contracting officer may adjust the liquidation rate used with progress payments under the alternate method. It covers the default rule that the liquidation rate established under FAR 32.503-8 stays in effect throughout performance, the purpose of the alternate method, the specific conditions that must be met before the rate may be reduced, the circumstances that require the rate to be increased or otherwise changed, and the need to document the change by contract modification. In practical terms, this section is about matching progress payment liquidation to the contractor’s actual profit profile so the Government recovers progress payments appropriately while allowing the contractor to retain earned profit on completed items. It also protects both sides by requiring current cost data, agreement on the rate, annual certification, and limits on unliquidated progress payments. For contractors, this can improve cash flow if they qualify for a lower liquidation rate; for contracting officers, it requires careful review of cost data, profit assumptions, and contract structure before approving any adjustment. The section also ensures that if profit expectations change later, the liquidation rate is adjusted so the Government is neither over- nor under-recouping progress payments.
Key Rules
Default rate stays in effect
The liquidation rate set under FAR 32.503-8 applies for the full period of contract performance unless the contracting officer changes it under the alternate method. The alternate method is an exception, not the norm.
Purpose is to preserve earned profit
The alternate liquidation rate method is intended to let the contractor keep the earned profit element of the contract price for completed items during liquidation. This means liquidation should recover progress payments without stripping out profit already earned on delivered work.
Reduction requires strict conditions
The contracting officer may reduce the liquidation rate only if all listed conditions are met, including a contractor request, no prior reduction in the last 12 months, a delivery schedule of at least 18 months from award, available actual cost data, and agreement on an appropriate rate. The contractor must also certify annually, or more often if requested, that the rate still satisfies the required conditions.
Government recovery must remain complete
Any reduced rate must still allow the Government to recoup, through each invoice, the full progress payments applicable to the costs allocable to that invoice. The contractor may not be paid more than the costs of delivered and accepted items, less allocable progress payments, plus earned profit on those items.
Unliquidated balance is capped
The reduced liquidation rate cannot cause unliquidated progress payments to exceed the limit in paragraph (a)(5) of the Progress Payments clause. This prevents the Government from carrying too much unrecovered progress payment exposure.
Rate changes when profit changes
The contracting officer must increase the liquidation rate if the contractor’s actual profit rate is lower than expected for items already delivered and for subsequent progress payments. The rate must also be increased or decreased when the contract price or target profit changes under successive-target fixed-price incentive contracts or prospective price redetermination contracts.
Contract modification is required
Whenever the liquidation rate changes, the contracting officer must issue a contract modification to update the Progress Payments clause. The regulation states that adequate consideration for these modifications is already included in the original contract, and the parties must promptly make any required payment or liquidation adjustments.
Responsibilities
Contracting Officer
Determine whether the alternate liquidation rate method may be used, verify that all required conditions are satisfied, and decide whether to reduce, increase, or otherwise adjust the liquidation rate. The contracting officer must also issue a contract modification whenever the rate changes and ensure the Progress Payments clause reflects the new rate.
Contractor
Request a reduction in the liquidation rate when appropriate, provide actual cost data and other supporting information, agree to the proposed rate, and certify annually or more often if requested that the alternate rate still meets the required conditions. The contractor must also comply with any resulting payment or liquidation adjustments.
Agency/Government
Protect the Government’s interest by ensuring progress payments are recouped in full as required, monitoring unliquidated progress payment exposure, and enforcing the limits and conditions tied to the alternate liquidation rate method.
Practical Implications
This section can materially affect contractor cash flow because a lower liquidation rate may leave more progress payment funds available during performance, but only if the contractor can document actual costs and meet the timing and profit conditions.
Contracting officers should be careful not to approve a reduced rate based on estimates alone; the rule requires actual cost data and a clear showing that the Government will still recover the proper amount on each invoice.
A common pitfall is failing to revisit the liquidation rate when profit assumptions change, especially in incentive or redetermined-price contracts where the target profit or price structure shifts over time.
Another risk is overlooking the annual certification requirement. If the contractor cannot continue to support the conditions for the alternate rate, the rate may need to be adjusted promptly.
Because every rate change requires a contract modification, parties should keep the Progress Payments clause and payment records synchronized to avoid billing disputes, over-liquidation, or delayed recoupment.
Official Regulatory Text
(a) The liquidation rate determined under 32.503-8 shall apply throughout the period of contract performance unless the contracting officer adjusts the liquidation rate under the alternate method in this 32.503-9 . The objective of the alternate liquidation rate method is to permit the contractor to retain the earned profit element of the contract prices for completed items in the liquidation process. The contracting officer may reduce the liquidation rate if- (1) The contractor requests a reduction in the rate; (2) The rate has not been reduced in the preceding 12 months; (3) The contract delivery schedule extends at least 18 months from the contract award date; (4) Data on actual costs are available- (i) For the products delivered, or (ii) If no deliveries have been made, for a performance period of at least 12 months; (5) The reduced liquidation rate would result in the Government recouping under each invoice the full extent of the progress payments applicable to the costs allocable to that invoice; (6) The contractor would not be paid for more than the costs of items delivered and accepted (less allocable progress payments) and the earned profit on those items; (7) The unliquidated progress payments would not exceed the limit prescribed in paragraph (a)(5) of the Progress Payments clause; (8) The parties agree on an appropriate rate; and (9) The contractor agrees to certify annually, or more often if requested by the contracting officer, that the alternate rate continues to meet the conditions of subsections5, 6, and 7 of this section.The certificate must be accompanied by adequate supporting information. (b) The contracting officer shall change the liquidation rate in the following circumstances: (1) The rate shall be increased for both previous and subsequent transactions, if the contractor experiences a lower profit rate than the rate anticipated at the time the liquidation rate was associated with contract items already delivered, as well as subsequent progress payments. (2) The rate shall be increased or decreased in keeping with the successive changes to the contract price or target profit when- (i) The target profit is changed under a fixed-price incentive contract with successive targets; or (ii) A redetermined price involves a change in the profit element under a contract with prospective price redetermination at stated intervals. (c) Whenever the liquidation rate is changed, the contracting officer shall issue a contract modification to specify the new rate in the Progress Payments clause.Adequate consideration for these contract modifications is provided by the consideration included in the initial contract.The parties shall promptly make the payment or liquidation required in the circumstances.